AOL CEO: Patch will make money, trust me, I mean it!

The bloated local-news site is burning cash, but Armstrong just can't let go

Speaking at an Internet conference hosted by Barclays Capital Tuesday, AOL CEO Tim Armstrong defended the controversial Patch website to investors, telling them that there was still a lot of potential money to be made on the project.

“One is the average Patch roughly costs $150,000 to run. The average marketplace that it's in has about $900 million of commerce. When you strip out cars and auto, there's still about $350 million to $400 million of commerce in most of the zip codes that we're in with Patch,” Armstrong said.

“And from a revenue standpoint, we just started ramping up the sales force last year which I was very direct about. I mean, I knew Patch was going to cost a lot of money and we were upfront about that... Patch has sold about 82% of the revenue that ran on Patch all of last year. It's already been signed so far this year. And I would expect it to grow really quickly.”

Sounds like a man desperately trying to make his case, without having much of a case to stand on.

Perhaps it's because Patch is Armstrong's baby. Patch was founded by Armstrong and Jon Brod in 2007, and was acquired by AOL in June 2009, only two months after Armstrong became CEO. AOL paid $7 million for Patch and has since invested $160 million into the company.

The idea behind Patch is to make it almost like a series of local online newspapers. It is a collection of websites that cover only news particular to one community, and only sells ad space to local businesses. The goal of the website was to relaunch and rebrand AOL beyond the dial-up Internet company it was for many years.

The problem is that the website has gone on to hire hundred of journalists, and now has websites in 22 states, plus the District of Columbia, serving 135 communities in California alone. Patch never became monetarily feasible though, perhaps because of its limited ad revenue potential. AOL was speculated to have lost $100 million on the site last year, with the company only selling $7.8 million worth of ad space.

Armstrong is perhaps the only person left who truly believes in the project, calling it “a good investment,” insisting that people are interested in the site and blaming the media for making people think otherwise.

“And when you look at Patch right now, there's tremendous interest in it, both from a consumer and advertiser landscape. There's no tremendous interest in it from a media landscape other than to say a lot of - basically, gossip about Patch in terms of what has happened, what's happening there and how is it performing and people love to talk about it.”

Patch is just one of the thorns in AOL's side. AOL is also burdened with other problems, not least of which is its aging user population.

The average age of an AOL's user is 40 years old, the oldest on the Internet. Around 75% of Gmail users are under 34. That number is over 50% for Yahoo. For AOL it is only 42%.

In July 2011, AOL had less than 60,000 emails sent per month, compared to nearly 250,000 for Gmail and almost 240,000 for Yahoo. Those are tough numbers, and if AOL really is losing as much money on Patch as it is speculated, it will be interesting to see how much longer they can really afford to keep it going.